Presentaci

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IESE Business School Universidad de Navarra
Expanding financial services for the
poor Banking the unbanked using prepaid
platforms and mobile phones (mobile banking)
Francesc Prior Sanz November, 2009
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Banking the unbanked
1. Introduction Access to finance and economic
development
2. Review of access to financial services
3. Solutions proposed for increasing access to
finance
4. Conclusions
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Access to finance and economic development
An extensive number of economic studies
demonstrate that there is a casual relationship
between financial deepening and economic
development (Schumpeter, 1911)
1- FIRST APPROACH The impact of credit in
economic growth has been extensively analyzed by
King Levine (1993) Demirguç-Kunt, and Loayza
(2000) that show that credit is the explanatory
variable in economic growth, especially in
countries with underdeveloped capital
markets 2-SECOND APPROACH The development of
capital markets is a second explanatory variable
for economic growth analyzed by Levine Zervos
(1998), Levine (1991), Bencivenga Smith (1991)
and specially Rojas-Suarez Weibrod
(1994) 3-THIRD APPROACH Explains economic
growth not only in relation to the development of
the banking sector, but also to its stability in
the provision of financing as an explanatory
variable on the levels of economic development
Freixas (1997), Rochet (1997), the Interamerican
Development Bank (2005) and Garrido (2005)
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Banking the unbanked
1- Introduction Access to finance and economic
development
2- Review of access to financial services
3. Solutions proposed for increasing access to
finance
4. Conclusions
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Review of access to financial services
According to the World Bank (Beck,
Demirgüç-Kunt, Levine, 1999), in the 24 most
developed countries, the average credit to the
private sector as a percentage of GDP was 84
between 1990 and 1999 while it was 33.6 in the
79 developing countries analyzed
Table 1 Financial development by region,
1990-99- Interamerican Development Bank, IPES
2005.
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Review of access to financial services
The factors that explain the lack of access to
financial services are related to the demand,
regulation, and supply
1- Price
SUPPLY OF FINANCIAL SERVICES INADEQUATEBUSINESS
MODEL
2- Distribution networks
3- Risk methodologies and database analysis
4- Regulatory framework
5- Lack of trust in the financial system and
financial education
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Review of access to financial services
1-Prices for basic financial services are
higher in developing nations that in developed
countries
Table 2 Interest rates differences and
efficiency by region, 1995-2002 , IPES 2005- Data
from IMF and Bankscope
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Review of access to financial services
However, Prices for basic financial services do
not refer not to only interest rates but also to
1- Minimum balances
Prices are too high mostly due to inefficient
business models and lack of competition in the
financial industry and a value management strategy
2- Maintenance costs of accounts, debit and
credit cards
3- Transfer and withdrawal commissions
4- Other commissions
5- Interest rates
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Review of access to financial services
2-Distribution networks are too limited because
traditional banking branches are too costly, so
alternative distribution networks are needed to
serve the population
Table 3 Density of bank branches and financial
deepening Based on data from Beck,
Demirguc-Kunt y Martinez Pereira, 2006
Source World Bank, 2005
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Review of access to financial services
3-Credit risk analysis methodologies are not
adapted to developing nations economies where
informal activities are so relevant
Only include stable and taxable cash flows
(wages) Do not include informal sources of
revenue Focus on already banked customers Do
not include socio-demographic variables Are too
slow and costly Require guarantees not adapted
to the informal economy Credit Bureaus do not
report non-banking credit experiences
Better use of technology and data is required in
order to improve risk methodologies and obtain
faster results
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Review of access to financial services
Credit risk methodologies Credit bureaux are
required in order to prevent over-indebtedness of
individual lenders. However, they need to be
complemented with additional methodologies as the
US subprime crisis shows
Getting credit. World Bank, 2006
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Review of access to financial services
4-The regulatory framework can increase costs
that affect the ability of financial institutions
to offer financial services to the non affluent
population
Most common regulatory obstacles in Latin
America are 1- Price Caps 2- Taxes on
transactions 3- Supervision Costs 4- Inadequate
system of guarantees 5- Government forced
investments in non profitable activities
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Review of access to financial services
In sub-saharian Africa, a major regulatory
effort has been undertaken where most countries
have recently updated their regulatory framework
for microfinance activities

• Kenya Microfinance Act 2006
• Uganda Microfinance Deposit Taking Institutions,
  2003
• Tanzania Microfinance Companies and microcredit
  activities 2005 Financial Cooperatives Societies
  Regulations 2005. Savings and Credit Cooperatives
  Regulations

However, since supply inefficiencies have not
been solved there is a clear lack of microfinance
supply in Sub Saharian -frica
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Review of access to financial services
Magreb While the financial sector has been
progressively deregulated, the microfinance
sector is mostly state controlled and not
adequately monitored

• Tunisia The microfinance law determines a price
  cap of 5 and gives the monopoly of microfinance
  activities to the government agency BTS, without
  providing adequate supervision
• Egypt There is no specific regulation for
  microfinance activities. So banks and non
  regulated NGOs provide most microcredit.
• Morocco The microcredit association law is a
  good framework for avoiding price caps, but their
  inability to collect deposits is a problem to
  solve
• Argelia The postal service is the leading
  microfinance distributor (third party provider)

The postal service is the leading provider of
microdeposits in all the region (French Colonial
institution) , although the existing law
prohibits this agency from granting credit
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Review of access to financial services
In the USA 40 million American households are
underbanked Customer identification requirements
and the retail payments structure are factors
that help explain this problem

• 1- Banking immigrants Identification
  requirements for opening bank accounts are vague
  
• No clear rule determines what documents are to be
  provided to comply with the know your customer
  rule
• and nothing prevents non US citizens from opening
  accounts
• and that the TIN is accepted by supervisors as an
  identification document
• in the current political context, the fact that
  most illegal immigrants have TIN and not social
  security numbers makes banks unwilling to open
  bank accounts to customers without Social
  Security Numbers

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Review of access to financial services
2- The retail payments structure in the USA is
characterized by the dominance of checks, and
importance of offline debit
Distribution of the number of Noncash Payments
for 2003 and 2000. Federal Reserve Payments
Study, 2004
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Review of access to financial services
The still inadequate pricing of ACH transfers
(direct debits and direct credits) compared with
checks by the Federal Reserve (the main ACH
provider), and the late differentiation of
interchange for online debit and offline debit
has negatively impacted the access to financial
services by the poor in the USA

• 1- The importance of checks has created a
  parallel network of financial services centers
  that offer not only check casing but also money
  transfers, bill payments, Earned Income Tax
  Credit declarations (EITC), short term credit
  (pay day lenders) even mortgages (subprime
  lenders)
• These financial centers offer much higher cost
  financial services but
• Serve unbanked immigrants
• US citizens that have been expelled from
  mainstream retail banking
• And other customers that are not being served by
  the retail banking industry in the US
• 2- The late adoption of online debit in the US,
  created overdraft risks that banks did not want
  to take with unknown customers

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Banking the unbanked
1- Introduction Access to finance and economic
development
2- Review of access to financial services
3. Solutions proposed for increasing access to
finance
4. Conclusions
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Solutions proposed for increasing access to
finance
The solutions proposed would apply existing best
practices in low cost banking and the better use
remittances
1- Specially tailored low cost financial
products prepaid instruments
2- Low cost distribution networks
3- Alternative risk methodologies
4- Optimization of remittances
5- Adapted regulatory framework and economies of
scale are needed in order to be able to afford
the infrastructures required
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Solutions proposed for increasing access to
finance
1- Prepaid instruments are the best electronic
banking products for banking the poor since
they function as a low cost bank account
Types of card products based on authorization and
authentication mechanisms
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Solutions proposed for increasing access to
finance
1- Prepaid instruments can be used for deposits
(where regulation allows), withdrawals and POS
transactions
Prepaid platforms have characteristics that make
them especially useful for developing low cost
payments systems 1-Customers using prepaid
systems do not need bank accounts, debit or
credit cards 2-Users do not need to develop or
invest in new technologies 3-This payment
mechanism can be used in a number of platforms
such as PCs, mobile phones, hand-held and set-top
boxes 4-It is a payment system specially designed
for micropayments, and microdeposits and even
microcredits (Banco de Crédito del Perú, Tarjeta
Solución Negocios) 5-Allow users control their
cash flow by receiving statements (some providers
offer this feature online others provide physical
statements) or accessing balances through PCs,
mobile phones, hand-held and set-top boxes.
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Solutions proposed for increasing access to
finance
2- LOW COST DISTRIBUTION NETWORKS are needed to
resolve the lack of banking branches
Cost comparison by distribution channel
Mobile phones and EFTPOS are the lowest cost
intermediation channels
But in order to use them prepaid instruments are
needed
Source Superintendencia de Bancos y Seguros del
Perú 2006
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Solutions proposed for increasing access to
finance
3- ALTERNATIVE RISK ANALYSIS METHODOLOGIES must
also use best practices in order to grant and
follow up small credits
Infrastructure and organizational changes
1- Inclusion of informal economy verified on the
field (PROCREDIT)
2- Automated acquisition and behavioral scorings
using socio demographic and payments information
3- Group based lending and village banking
(COMPARTAMOS)
4- Decentralization of the credit risk analysis
(ACCION INTERNATIONAL)
5- Use of Credit Bureaux
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Solutions proposed for increasing access to
finance
4- BANKING REMITTANCES flows and receivers will
allow to exploit synergies between the banking
and remittances industry
Comparing the value chain of the banking and
remittances industry shows potential savings in
common elements such
The technology platform
Risk analysis
Financial services distribution network
Call center and Internet
Marketing and commercial campaigns
POS network and SME business
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Solutions proposed for increasing access to
finance
Country of origin
200
Recibo con No. confirmación
Plataforma validadora
Cliente
Agencia emisora
Terminal Intranet Corporativa
No. confirmación
Tesorería Operaciones de divisas
On line / Tiempo Real
Agencia receptora en país de destino
Banco o entidad asociada en país destino
Cash
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Beneficiario Recibo de la orden de pago
en moneda local
No. confirmación Cédula identidad o Pasaporte
Punto de pago No. 1....N
Country of destination
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Solutions proposed for increasing access to
finance
5- Adapting the regulatory framework to the
needs of the poor
1- Support the development of prepaid instruments
and low cost intermediation channels by
developing e.money regulations that allow all
basic payment functions on prepaid accounts from
low cost intermediation channels

• 1- Development of e-money regulation
• Europe The e-money Directive of 2000
• USA The emergence of the SVC industry under the
  MSB regulation
• 2-Development of agents regulation
• Review of banking correspondents regulation in
  Perú, Brazil and Colombia

2- Support the emergence of economies of scale
for developing common platforms for Microfinance
Institutions (Bansefi- Mexico)
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Banking the unbanked
1. Introduction Access to finance and economic
development
2. Review of access to financial services
3. Solutions proposed for increasing access to
finance
4. Conclusions
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Conclusions
Banking access in developing nations is very low
due not only to demand and regulation, but mostly
due to supply inefficiencies
Supply side factors can be resolved using
existing banking techniques and the optimization
of remittances
1- Price of financial services 2- Density of
banking networks 3- Credit risk
methodologies 4- Non optimization of
remittances 5- Regulatory framework
1- Prepaid instruments 2- Low cost distribution
networks 3- Alternative credit risk analysis
methodologies 4- Banking remittances 5- Adapted
regulation on e-money, agents and common platforms
THE SOLUTION IS TECHNICALLY FEASIBLE AND
FINANCIALLY SOUND
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Conclusions
Mobile banking is the most adapted value
proposition for banking the poor using prepaid
platforms and low cost distribution channels
Classification of emerging m-banking models